WEBVTT NOTE Producing Prosperity: An Inquiry Into the Operation of the Market Process 1 00:00:00.000 --> 00:00:07.960 Thank you very much, Mark. It's great to be here, and I'll just follow up on something 2 00:00:07.960 --> 00:00:14.340 that Tom DiLorenzo said about students being hungry for these ideas, and he said professors 3 00:00:14.340 --> 00:00:18.240 don't want their students to hear it. Actually, maybe I'm the opposite of that, but I will 4 00:00:18.240 --> 00:00:24.240 say, you know, one nice thing about the Mises Institute is there's a lot of literature that's 5 00:00:24.240 --> 00:00:29.080 online and easy for students to get, and they run into it. My students run into it without 6 00:00:29.080 --> 00:00:32.600 without my saying you need to go to this website and look my students run into this stuff and 7 00:00:32.600 --> 00:00:38.920 ask me about it all the time so it's just great that the institute has so much literature 8 00:00:38.920 --> 00:00:44.000 online and students are picking it up they're finding it on their own and if you're in my 9 00:00:44.000 --> 00:00:50.320 generation you're used to reading stuff you know paper paper stuff and and really I mean 10 00:00:50.320 --> 00:00:56.280 students these days don't do that I'll recommend sometimes that they read something and a student 11 00:00:56.280 --> 00:00:59.840 will come back to me and say, I've looked all over, I can't find it. 12 00:00:59.840 --> 00:01:01.840 So, did you look in the library? 13 00:01:01.840 --> 00:01:04.360 No, I haven't looked there yet. 14 00:01:04.360 --> 00:01:11.200 So anyways, I just, so, you know, get attuned to that's the way students think. 15 00:01:11.200 --> 00:01:17.240 I did bring a copy of the book, that copy looks like it's a lot bigger, and it's a brand 16 00:01:17.240 --> 00:01:25.200 new book, it's 2013, Producing Prosperity, and so let me just give you an idea about 17 00:01:25.200 --> 00:01:27.600 What's in the book and what motivated me to write it? 18 00:01:27.600 --> 00:01:34.080 Because it's really a book about economic analysis and analyzing 20th century economic 19 00:01:34.080 --> 00:01:37.880 analysis from an Austrian standpoint. 20 00:01:37.880 --> 00:01:48.480 But let's think about how well off that we are today compared to people 100 years ago, 21 00:01:48.480 --> 00:01:51.400 50 years ago, 20 years ago. 22 00:01:51.400 --> 00:01:52.400 I've been around long enough. 23 00:01:52.400 --> 00:01:58.120 I can remember the first time I saw a microwave oven, and I do know, because I used to teach 24 00:01:58.120 --> 00:02:02.520 here at Auburn, I moved 25 years ago, wow. 25 00:02:02.520 --> 00:02:06.480 But I know nobody had a cell phone in Auburn when I moved away, because there wasn't any 26 00:02:06.480 --> 00:02:08.280 cell service in Auburn. 27 00:02:08.280 --> 00:02:10.480 Now everybody has one. 28 00:02:10.480 --> 00:02:15.960 We take it for granted, but you look at people in poverty today in the United States. 29 00:02:15.960 --> 00:02:21.480 They have microwave ovens, they have flat-screen televisions, they have cell phones, not to 30 00:02:21.480 --> 00:02:26.600 to mention, you know, electricity, air conditioning, indoor plumbing, they have automobiles. 31 00:02:26.600 --> 00:02:36.320 So you look at how well off we are today and it's because of economic progress and so what 32 00:02:36.320 --> 00:02:46.520 I wanted to do in this book is to try to align economic theory more with this idea about 33 00:02:46.520 --> 00:02:51.140 the economic progress that has actually produced prosperity because when you look at the development 34 00:02:51.140 --> 00:02:55.700 of Economics, and I'm not talking about the Austrian School, but you just look at the 35 00:02:55.700 --> 00:03:01.820 development of economics in the 20th century, and that development has been mostly trying 36 00:03:01.820 --> 00:03:04.980 to better understand the properties of economic equilibrium. 37 00:03:04.980 --> 00:03:07.180 And it hasn't always been that way. 38 00:03:07.180 --> 00:03:13.540 I do have a chapter in the book, it's about the history of economic thought, and if you 39 00:03:13.540 --> 00:03:20.020 go back to the 18th century, which is maybe the beginning of economic analysis, and I'll 40 00:03:20.020 --> 00:03:37.020 I'll use Mises as my source for that. If you read Human Action, the very first sentence in the book is economics is the youngest of all sciences, and he talks about how it's only recently that people have discovered this remarkable interdependence of economic phenomena. 41 00:03:37.020 --> 00:03:44.020 So if you go back to the 18th century, the big issue in economics was how is wealth created? 42 00:03:44.020 --> 00:03:49.140 and you look at the mercantilists who thought accumulating gold and silver was how you get wealthy, 43 00:03:49.140 --> 00:03:53.940 physiocrats thought wealth came from the land, you look at Adam Smith's book, The Wealth of Nations, 44 00:03:53.940 --> 00:03:58.980 the title tells you what he's talking about, actually the full, that Wealth of Nations, that's the movie title, 45 00:03:58.980 --> 00:04:04.900 the full title of the book is An Inquiry into the Nature and Causes of the Wealth of Nations, 46 00:04:04.900 --> 00:04:09.380 that's what Adam Smith was interested in, you know, how is wealth created, 47 00:04:09.380 --> 00:04:39.380 And that idea sort of came to an abrupt end, at least partly because of the ideas of Thomas Robert Malthus, you know, and so Malthus thought, you know, most people are going to be stuck at a subsistence level, going to be stuck in poverty because population growth is going to outstrip the availability of resources. So it just doesn't really matter how wealth is created if everybody's always going to be poor. And so you look at the development of economics in the 19th century. 48 00:04:39.380 --> 00:04:44.380 And one of the big issues, at least from the standpoint of economic theory, was what determines value. 49 00:04:44.380 --> 00:04:51.380 The labor theory of value that David Ricardo developed that you find in Marx on one side, 50 00:04:51.380 --> 00:05:01.380 and then with the marginal revolution and Carl Menger's ideas, subjective theory of value, demand side theory of value, 51 00:05:01.380 --> 00:05:11.380 a utility theory of value in contrast with the supply side, objective labor theory of value, what determines value. 52 00:05:11.380 --> 00:05:18.680 That was a big issue in the 19th century that was more or less settled, at least the way contemporary economists would view it, 53 00:05:18.680 --> 00:05:23.280 more or less settled in Alfred Marshall's Principles of Economics. 54 00:05:23.280 --> 00:05:28.380 And there's a section in Marshall where Marshall talks about, you know, what is it that determines values? 55 00:05:28.380 --> 00:05:30.780 Is it the supply side? Is it the demand side? 56 00:05:30.780 --> 00:05:34.380 says we might as well ask which blade of the scissors does the cutting? 57 00:05:34.380 --> 00:05:37.140 You know, it's both, it's supply and demand. 58 00:05:37.140 --> 00:05:42.260 And that answered the question, I think pretty much the way most economists would answer it today, 59 00:05:42.260 --> 00:05:44.860 but answered it in an equilibrium framework. 60 00:05:44.860 --> 00:05:47.940 So Marshall has this equilibrium framework, 61 00:05:47.940 --> 00:05:52.100 and if you look at the development of economics throughout the 20th century, 62 00:05:52.100 --> 00:05:56.260 it's been trying to better understand the properties of economic equilibrium. 63 00:05:56.260 --> 00:06:04.380 You look at microeconomics, and in microeconomics, the development of micro, we have this idea 64 00:06:04.380 --> 00:06:09.940 of a Pareto optimal allocation of resources, that's the best you can get, and so we look 65 00:06:09.940 --> 00:06:15.540 at all these problems of market failure, externalities and public goods and monopolies and things, 66 00:06:15.540 --> 00:06:20.620 and then we look for ways that we can solve those market failure problems, and once we 67 00:06:20.620 --> 00:06:24.700 do that, once we get to a Pareto optimal allocation of resources, then what? 68 00:06:24.700 --> 00:06:29.260 Well, that's it. That's what we wanted to do. So we're there. You know, we'd maximize welfare. 69 00:06:29.260 --> 00:06:36.140 The same thing is true in macroeconomics. If you look at macroeconomics, big issue there is instability. 70 00:06:36.140 --> 00:06:42.780 And the idea is, how do we get to a macroeconomic equilibrium of full employment and low inflation? 71 00:06:42.780 --> 00:06:47.020 And then what? No, that's what we wanted. That's the goal. Once we're there, that's the goal. 72 00:06:47.020 --> 00:06:51.740 And so throughout the 20th century, in microeconomics and macroeconomics, 73 00:06:51.740 --> 00:06:59.060 What economic analysis has done has been to try to better understand the properties of 74 00:06:59.060 --> 00:07:01.580 economic equilibrium. 75 00:07:01.580 --> 00:07:08.300 But when you look at, again, how well off we are today, is it because we're closer 76 00:07:08.300 --> 00:07:10.620 to Pareto optimality than we were before? 77 00:07:10.620 --> 00:07:15.380 No, it's economic progress that improves our welfare. 78 00:07:15.380 --> 00:07:23.180 And so there's a mismatch between the economy that's described in economic theory and the 79 00:07:23.180 --> 00:07:28.800 actual real world economy that makes us as well off as we are today, progress versus 80 00:07:28.800 --> 00:07:29.800 equilibrium. 81 00:07:29.800 --> 00:07:39.620 I have another chapter in the book where I talk about the concept of equilibrium, but 82 00:07:39.620 --> 00:07:46.620 And I contrast that, and I look at what markets actually do, and when you look at the entrepreneurial 83 00:07:46.620 --> 00:07:52.740 nature of the economy, the economic progress that takes place, equilibrium really isn't 84 00:07:52.740 --> 00:07:56.140 descriptive of what an economy does. 85 00:07:56.140 --> 00:08:01.900 If you think about the concept of equilibrium, it means if you disturb the equilibrium, there's 86 00:08:01.900 --> 00:08:07.300 a tendency for the economy to return back to that equilibrium. 87 00:08:07.300 --> 00:08:09.380 But for the most part, that's not what happens. 88 00:08:09.380 --> 00:08:15.320 The things that disturb an equilibrium in an economy, in a growing economy characterized 89 00:08:15.320 --> 00:08:20.260 by economic progress, there are those entrepreneurial actions that change the underlying nature 90 00:08:20.260 --> 00:08:21.500 of the economy. 91 00:08:21.500 --> 00:08:25.580 So when an entrepreneur does something to disturb the economy, it never returns back 92 00:08:25.580 --> 00:08:26.580 to where it was before. 93 00:08:26.580 --> 00:08:28.540 There are new underlying conditions. 94 00:08:28.540 --> 00:08:33.540 Now, you know, we might say in a sense, well, the equilibrium is always changing, but that 95 00:08:33.540 --> 00:08:37.220 violates the concept of equilibrium, right? 96 00:08:37.220 --> 00:08:42.220 We don't have an equilibrium in the economy. We have continual economic progress. I really 97 00:08:42.220 --> 00:08:48.660 don't use the word equilibrium in my classes or in the book too much. I talk about concepts 98 00:08:48.660 --> 00:08:54.300 of equilibrium, but it is true that there's a tendency for the quantity supplied to equal 99 00:08:54.300 --> 00:09:00.100 the quantity demanded in all markets. I would call that market clearing, not equilibrium. 100 00:09:00.100 --> 00:09:05.300 So we can talk about the market forces that lead markets to clear, by which we mean the 101 00:09:05.300 --> 00:09:10.820 The quantity supplied equals the quantity demanded, but that's not an equilibrium in the sense 102 00:09:10.820 --> 00:09:16.540 that the things that disrupt the economy change the underlying conditions so the economy never 103 00:09:16.540 --> 00:09:20.340 returns back to what it was. 104 00:09:20.340 --> 00:09:25.940 And those disruptive forces in the economy, the big disruption is entrepreneurship. 105 00:09:25.940 --> 00:09:32.380 You have these innovations that take place in the economy as a result of the actions 106 00:09:32.380 --> 00:09:39.900 of Entrepreneurs and that creates this economic progress. 107 00:09:39.900 --> 00:09:46.180 And so what I'm arguing in the book is we need to change the framework of our analysis 108 00:09:46.180 --> 00:09:50.740 and actually in this room maybe I shouldn't say we, maybe I should be saying they. 109 00:09:50.740 --> 00:09:55.220 They need to change the framework of their economic analysis to make economic analysis 110 00:09:55.220 --> 00:10:02.140 more descriptive of the actual economy that creates this economic progress. 111 00:10:02.140 --> 00:10:16.540 So I do talk a lot in the book about entrepreneurship, and if you look at the actions of entrepreneurs, 112 00:10:16.540 --> 00:10:22.740 one interesting issue to consider that I talk about a lot in the book, and I might also 113 00:10:22.740 --> 00:10:29.940 give a plug to Dom Armantano's book, Dom is going to be talking tomorrow or later, because 114 00:10:29.940 --> 00:10:36.660 He has the same type of idea at the beginning of his book, but I looked at a whole bunch 115 00:10:36.660 --> 00:10:42.700 of intermediate microeconomics books to see what's actually taught in the classroom on 116 00:10:42.700 --> 00:10:43.700 several topics. 117 00:10:43.700 --> 00:10:46.120 I'll give you a couple of examples. 118 00:10:46.120 --> 00:10:49.540 One of them is product differentiation. 119 00:10:49.540 --> 00:10:54.020 So you look at product differentiation in standard microeconomics textbooks, and what 120 00:10:54.020 --> 00:10:56.860 you'll find is they'll tell you there's a trade-off. 121 00:10:56.860 --> 00:11:01.540 You get more variety in products, but firms are not producing at minimum average total 122 00:11:01.540 --> 00:11:06.900 cost, so you have higher cost in exchange for greater variety. That's the trade-off. 123 00:11:06.900 --> 00:11:12.260 But if you think about an economy in terms of economic progress, product differentiation 124 00:11:12.260 --> 00:11:19.300 is what creates economic progress. It generates welfare because firms aren't just trying 125 00:11:19.300 --> 00:11:22.960 to make their products different. That doesn't give them any special advantage. They're trying 126 00:11:22.960 --> 00:11:40.920 and also if you look at the model of pure competition in neoclassical microeconomics, 127 00:11:40.920 --> 00:11:46.680 if you just grab an economist out of any economics department and say, you know, tell me about 128 00:11:46.680 --> 00:11:51.800 pure competition, one of the things they'll tell you is competitive firms have homogeneous 129 00:11:51.800 --> 00:11:56.360 Products. But that's an assumption in the model. It's not a conclusion from the model. 130 00:11:56.360 --> 00:12:01.560 We assume they have homogeneous products in order to be able to add up the individual 131 00:12:01.560 --> 00:12:06.060 firms to get the total market because, like, you can't add up apples and oranges. But it's 132 00:12:06.060 --> 00:12:10.940 an assumption in the model. Actually, when you look at the actual process of competition, 133 00:12:10.940 --> 00:12:14.080 product differentiation is a feature of competition. 134 00:12:14.080 --> 00:12:19.480 Let me give you another example. Again, you look at a whole bunch of intermediate microeconomics 135 00:12:19.480 --> 00:12:32.200 in the US textbooks, and you look at competitive markets, and one of the things we find in 136 00:12:32.200 --> 00:12:37.880 competitive markets is all the textbooks say you can't do any better than just earn a normal 137 00:12:37.880 --> 00:12:38.880 profit. 138 00:12:38.880 --> 00:12:44.340 The best thing you can do is combine your inputs into outputs in order to earn a normal 139 00:12:44.340 --> 00:12:45.340 profit. 140 00:12:45.340 --> 00:12:46.340 You can't do any better than that. 141 00:12:46.340 --> 00:12:50.660 Then you read a couple chapters ahead in the book and there's a chapter on monopoly, on 142 00:12:50.660 --> 00:12:55.220 how, you know, if you have a differentiated product you can earn these monopoly profits. 143 00:12:55.220 --> 00:12:59.100 But wait a minute, let's go back to the earlier chapter. 144 00:12:59.100 --> 00:13:03.820 If you're in a competitive market and you want to maximize your profits, try to get 145 00:13:03.820 --> 00:13:09.180 some monopoly power and how you do that through product differentiation. 146 00:13:09.180 --> 00:13:17.420 So I talk about some welfare issues, and I'll just say since I'm running out of time, you 147 00:13:17.420 --> 00:13:21.660 know, the whole concept of economic welfare, there's this idea of a welfare maximum that's 148 00:13:21.660 --> 00:13:27.520 a Pareto Optima, but actually welfare maximization is a process whereby our standard of living 149 00:13:27.520 --> 00:13:37.580 continues to go up. It's not an outcome, it's a process, and so, you know, there's another 150 00:13:37.580 --> 00:13:50.580 in the area where I look at neoclassical economics and find some issues, I do have a chapter also on policy issues, so you might say, well okay, that's fine, but what difference does this really make to economic policy? 151 00:13:50.580 --> 00:14:05.580 I do have a chapter where I talk about economic policy, and again I'll give a nod to Dom Armantano, but you look at antitrust policy, and there's an example where a flawed theory leads to a flawed policy. 152 00:14:05.580 --> 00:14:11.260 So, what I try to do in the book is to lay out a framework where we can understand from 153 00:14:11.260 --> 00:14:19.060 this market process point of view how to look at economic phenomena, and in a sense, I look 154 00:14:19.060 --> 00:14:24.700 at it as laying out a framework where we can develop ideas for future research, and on 155 00:14:24.700 --> 00:14:30.060 that note, I'll just give a plug later on today, I'm in a panel where I'm presenting 156 00:14:30.060 --> 00:14:46.700 Thank you for giving me the opportunity to talk a little bit about my book.